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Apple Inc. makes far too much money. And, as Apple’s cash stockpile grows, the money becomes a bigger drag on share value through decreased returns on equity.

The problem is the majority of Apple’s cash hoard is domiciled offshore (70% at the end of last quarter). The cash can’t simply be handed to investors through dividends or share buybacks. That would require repatriating the cash first and having to pay roughly $25 billion in taxes. Unwilling to surrender that money, Apple has instead been lobbying Congress for years to let it return the cash to shareholders without onerous consequences.

Meanwhile, investors were restless. At its recent low, cash represented 39% of Apple’s share price and activist investors were urging the company to do something. David Einhorn’s plan to issue perpetual preferred shares garnered media attention and might be what spurred Apple’s board to finally act.

Rather than resorting to arcane financial engineering, Apple decided to issue debt. With interest rates bottoming out, the time to borrow could not be better. More importantly, the debt gives Apple the U.S. domiciled cash it needs to boost its profile with shareholders by hiking the dividend and undertaking the largest share buyback plan in history.

The idea is not unique. Microsoft has issued roughly $15 billion in debt over several years to counterbalance its excess offshore cash reserves. Apple was already paying a dividend of $2.65 per quarter and created a $10-billion buyback
plan, but the repurchases merely offset the dilution caused by share-based compensation.

The company’s new plan takes it to a different level of shareholder friendliness. Apple hiked its dividend 15% and increased its share repurchase plan to $60 billion. To facilitate this, the company issued $17 billion in bonds with maturities ranging from three to 30 years. The debt issue was one of the largest in history and reportedly two times oversubscribed.

Neither here nor Eire

Even with the debt offering, Apple still needs to deal with its repatriation tax dilemma. Other tech giants with large offshore cash hoards include Google, Oracle, Cisco and Qualcomm. Like Apple and Microsoft, these firms are hoping for a repatriation tax holiday—similar to the one extended in 2004 and 2005. While there are ongoing discussions with Congress and the current administration, the process is moving slowly.

One positive sign was when Apple CEO Tim Cook was invited to President Obama’s State of the Union Address in February. The president mentioned Apple would return manufacturing jobs to the U.S. One criticism of the last repatriation tax holiday was that it cost the Treasury billions and didn’t increase U.S. jobs.

More recently, Cook testified to a U.S. Senate subcommittee on the details of Apple’s offshore tax strategy centred in Ireland. While a congressional report revealed that Apple claimed tax residency in neither the U.S. nor Ireland (and did not pay taxes in either jurisdiction), the questions lobbed at Apple executives by the senators mostly highlighted deficiencies in the tax code, rather than imply the company cheated (see “Tim Cook testifies,” next page).

Success metrics

The market seems to approve of Apple’s plans, with shares rising 15% since April. Given its success, it hasn’t taken long for similar plans to emerge in Canada.

When news broke that U.S. activist investor Highfields Capital Management was in talks with Tim Hortons to increase shareholder value, Tim Hortons’ share price jumped 7%.

Highfields’ two-pronged plan involved halting investment in Tim Hortons’ U.S. expansion and recapitalizing the company through various means. All in, Highfields estimated Tim Hortons shares could rise to $100 in 12 to 18 months.

In its published letter, Highfields proposed converting Tim Hortons to a REIT similar to Loblaws or Canadian Tire (“REIT spinoffs create value, Advisor’s Edge Report, March 2013”). It argued that doing so would boost return on capital, return on equity and earnings per share. While finding it intriguing, Tim Hortons poured cold water on the idea, claiming many of its locations are leased and there’s not much hidden value.

Highfields’ letter also referenced a recapitalization plan that takes advantage of historically low interest rates. According to sources familiar with Highfields’ presentation to management, this would mean issuing $3.4 billion of debt to repurchase over one-third of Tim Hortons’ shares.